Double-hike
The Reserve Bank increased the cash rate target by 50 basis points yesterday, to tackle the significant increase in higher-than-expected inflation.
Given that May's Meeting Minutes suggested a 25 basis point increase signalled a return to "normal operating procedures", an increase of 50 basis points took the market a little by surprise, and sent a signal that the RBA is not prepared to fall behind the curve.
From all the online frothing you'd be forgiven for thinking that the cash rate target was 8.50 per cent, but in fact this only takes the target back to 0.85 per cent.
The first thing to note here is that nobody can say for sure what happens next.
It was only in the second half of last year that economists were calling for a lower inflation target, but now the RBA sees inflation as broad-based and running above target, even if it is expected to moderate as the global supply-side challenges are resolved.
Things are moving quickly, and we'll have to see what plays out from here.
A stitch in time
Electricity prices are expected to soar in the second half of 2022, comfortably dwarfing any increases seen through droughts or the introduction of the carbon tax in the Gillard years, although thankfully electricity accounts for only a few per cent of the CPI basket.
Westpac's Justin Smirk highlights that after accounting for volatility due to power bill rebates some of the associated inflation pressures will come through in the December quarter of this year, after which inflation will start to ease.
Source: Westpac Economics
Financial markets are still pricing for aggressive interest rate hikes over the coming six months, perhaps in part driven by risk aversion and hedging (h/t Peter Martin, The Conversation).
The Reserve Bank did note that it would be guided by incoming data and its own assessment for inflation and the labour market outlook.
Consumer confidence is already on a par with global financial crisis lows, so it's not yet clear how many more hikes households and the consumer economy will bear at this point.
The silver lining may well prove to be that by going harder now this saves the need for higher interest rates later.
The headlines note that yesterday's increase was the biggest hike in 22 years, but look a bit closer and you'll note that interest rates were already being cut again only a year later, and aggressively so.
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More grown-up commentary and analysis as always from James Foster here.
